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Market failure occurs when the forces of supply and demand lead to an inefficient outcome

Externalities

Higher prices for consumers

The price in the domestic market rises from market price to (market price + tariff), which means that consumers must now pay higher prices and buy fewer goods overall.

Retaliation by trade partners

Historically, countries have been known to impose counter-tariffs when initial tariffs are imposed, which in turn reduces exports and undermines the economic benefits of tariffs

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Who it can affect

Consumers: People and businesses pay more for goods. This can limit their spending power and access to affordable products.

Foreign Suppliers: Tariffs hurt their ability to sell to the U.S., leading to trade tensions or retaliation.

Government: Tariffs bring in money and protect some industries, but they hurt the overall economy and don’t always achieve their goals, like creating jobs.

We recommend not implementing tariffs but if you are going to, then they should be in smaller amounts and eased onto the economy rather than enforcing a high tax rate immediately

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Government Regulations

Government regulations and taxes can impede market forces because the an implemented tariff increases the cost of goods, and decreases the amount of goods that are bought and sold

Unintended consequences

Deadweight loss

When the price of goods with a tariff rise above the world price, there is a decrease in the quantity of goods bought and sold in the domestic economy, which creates a deadweight loss. This deadweight loss leads to decreasing market efficiencies within the economy and is ultimately a market failure

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Trump’s tariffs on steel increased the price of steel in the domestic market due to a decreased supply. This made it more expensive for domestic car manufacturers to produce their goods, which could increase the price for consumers, and even cause layoffs and lower wages for these companies because they could not absorb the increased production costs.

Trump's previous tariffs on the steel industry did not create any new jobs and actually led to the US steel market declining

Trump's newly proposed tariffs are likely to result in similar market inefficiencies

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According to this graph, when the price of T-shirts with a tariff rises above the world price, there is a increase in the quantity of shirts supplied and a decrease in the quantity of shirts demanded.

We can see that consumer surplus decreases as a result of the tariff, as the overall area under the demand curve and over the world price decreases.

The price in the domestic market rises from world price to (world price + tariff), which means that consumers must now pay higher prices and end up buying fewer goods overall.

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Tariffs essentially are taxes imposed on imported goods

The basics of supply and demand directly are impacted by tariffs, with a leftward shift on the supply curve if increased

This will lead to an increased cost of goods as a result of higher import costs

This will also lead to increased prices that decrease consumer incentives to purchase therefore also shifting the demand curve left.

Due to these shifts, it leads to market inefficiency creating deadweight loss.

The trade deficit did not actually decrease in 2018 from Trump's increased tariffs.

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The article that inspired our presentation was a BBC article titled "Would Trump's Tariffs Hurt U.S Consumers". With the recent election and the new president-elect, we as a group had many questions about the policies he planned to enact. When looking at his economic plans regarding tariffs, it became clear the class modules and economic concepts were directly applicable and would help explain the impacts of these tariffs.

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This article covers how tariffs work from a broad standpoint, and then goes into more specific impact of these policies. It covers rising prices and how consumer and company behavior will lead to these changes, and also goes into the job market and impact on trade deficit. The article employs examples from past experiments with tariffs and the impacts fueling the logic for what will happen in the present economic climate.

Overall, the article covers these topics with real world examples and clear application to the concepts discussed in class.

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How these modify the standard equilibrium model

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How these modify the standard equilibrium model

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Deadweight loss

In the standard equilibrium model, free trade leads to maximum efficiency in the market. A tariff imposed on this market will change the equilibrium by raising prices, decreasing consumption, and reducing imports which all lead to deadweight loss.

Higher prices for consumers

Since this is a policy intervention, it alters the assumptions of the standard equilibrium model by introducing inefficiencies leading unequal impacts on consumers and higher prices for them.

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As for the producer surplus, when the tariff is introduced, domestic producers gain from selling higher prices and producing more, increasing their surplus.

Deadweight loss results from some consumers who would have bought the product at a lower price but will no longer buy it due to the higher price after the tariff.

Similarly, domestic producers expand their production to replace these imports, however, this additional production often comes from higher-cost providers who are less efficient than the foreign suppliers they replace.

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How these modify the standard equilibrium model

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How these modify the standard equilibrium model

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Retaliation by trade partners

Retaliation tariffs end up reduce exports from the imposing country which erodes the benefits domestic producers may have gained from the initial tariff

This creates another layer of inefficiency and can even create a net loss of jobs and economic output in the sectors that were targeted by the retaliation